NIGERIAN BREWERIES PLC: Earnings dampened by tough operating business environment

In a better position to benefit from such growth as it controls the largest market share in Nigeria. Thus, there is a positive outlook in top-line and bottom-line earning for the current financial year. Based on historical year-ended financial performance

Nigerian Breweries (NB) Plc, the largest brewing company in Nigeria by market capitalization and operational scale, is a renowned name in the consumer goods segment.The brewer has a robust brand portfolio which includes names such as: Maltina, Star Lager Beer, Gulder Lager Beer and Heineken Lager Beer.The company has eight operational breweries across Nigeria, and ultramodern malting plants in Aba and Kaduna. The company recently released its first quarter result for the period ended March 2016 showing a marginal rise in performance as sales increases during the festive Easter period. Nevertheless, a number of operational bumps were also noted due to inherent macro-economic factors. The company’s management has kept up with its regular dividend payment, and has recommended a total dividend payment of N28.54 billion (on the basis of N3.60 per share) for every 50 kobo share, which is lower than the N4.70 per share paid last year.

ECONOMIC UNCERTAINTY INTHE COUNTRY WEAKENS NB GROWTH POTENTIALS

The brewing company in its released unaudited first quarter result for March 2016 showed a modest growth of 10.92% in revenue to N77.55 billion from N69.92 billion in March 2015, while net income grew by a marginal figure of 3.49% to N10.45 billion from N10.10 billion in corresponding year of 2015.The performance of the brewing company can be attributed to a better business environment than first quarter 2015 which witnessed a more difficult operating environment due to instability caused by the general elections which impacted purchasing power and businesses. Moreover, the importance of the Nigerian beer market cannot be overemphasised in the company’s operations, as sales in Nigeria continue to account for more than 97% of total revenue. Furthermore ,the company’s cost of sales grew by 11.85% to N40.27 billion in March 2016 from N36.01 billion in March 2015 due to increase in cost of raw materials, especially sorghum which the company uses in the production of beer. Cost of sales remained stable at 51% as it consumes more than half of the company’s total revenue. The company’s gross profit increased by 9.92% to N37.28 billion from N33.92 billion year on year, while its gross profit margin decreased to 48.07% as at first quarter 2016 from 48.51% as at first quarter 2015.

SIGNIFICANT INCREASE IN FINANCIAL CHARGES AND OPERATING EXPENSES IMPEDES STRONG GROWTH IN NET INCOME

Operationally, Nigerian Breweries Plc recorded a modest rise of 9.93% in operating profit to N17.99 billion March 2016 from N16.37 billion in March 2015. The company was able to grow its operating profit in spite of 9.92% rise in total expenses to N19.43 billion from N17.68 billion recorded in March 2015.The reason for the spike in total operating expenses was due to cost associated with distribution and marketing expenses which rose by 22.28% to N5.83 billion from N4.76 billion in March 2015. Other expenses are: advertising expenses and depreciation which grew by 7.27% and 4.21% respectively. The company also recorded a significant drop of 44.42% in finance income to N59.38m in March 2016 from N106.83m reported in March 2015. It can be assumed that the reduction was due to fall limited or no sale of obsolete assets, which may generate income; and the unfavourable movements in foreign exchange rate. Furthermore, the company incurred financial charges to N3.05 billion from N2.04 billion year on year, reflecting a change of 49.58% driven mainly by increased interest expense on net pension liability. Despite the current challenging operating environment leading to consumer down-trading, rising inflation, increased cost of financing, higher foreign exchange cost and increasing input cost amongst other, the company was able to grow its pre-tax earnings modestly by 3.94% to N15.01 billion from N14.44 billion during the period under review while its net income grew by 3.49% to N10.45 billion from N10.10 billion year-on-year.

ASSET QUALITY

The company’s key performance metrics remains strong though there slight negative change in profit margins as reported. Current ratio rose to 50.38% from 41.03% as at December 2015. Return on average equity (ROAE) currently stands 5.89% and return on average asset at 2.89%.

GEARED TO BENEFIT FROM THE MERGER WITH CONSOLIDATED BREWERIES

The Nigerian brewing space is currently controlled by two major players accounting for about 90% of the market, while other fringe players control the remaining share. Nigerian Breweries is the biggest player in the sector with a total installed capacity of 15.4mhl. Guinness Nigeria Plc is the second biggest player with 5.5mhl installed brewing capacity. Other players are International Breweries Plc, Champion Breweries Plc and Jos Breweries Plc which among themselves control a limited of market share.

WE MAINTAIN OUR BUY RECOMMENDATION

The performance of Nigeria Breweries Plc in the first quarter of 2016 was better compared to the corresponding quarter of 2015 despite prevailing operational challenges. No doubt the Company has structured its activities to adapt to the continuous operating challenges such as: poor condition of transport infrastructure, insecurity, high and increasing input costs, and unreliable power supply. This is in addition to the observed contraction in household consumption expenditure during the first quarter of the year as a result of persistent hike in prices of goods and restrictive economic activities in the country around. Recent report shows that Africa, especially Nigeria has the fastest growing beer market for the next five years. Nigeria Breweries with its recent merger with Consolidation Breweries is

RECENT REPORT SHOWS THAT AFRICA, ESPECIALLY NIGERIA HAS THE FASTEST GROWING BEER MARKET FOR THE NEXT FIVE YEARS. NIGERIA BREWERIES WITH ITS RECENT MERGER WITH CONSOLIDATION BREWERIES IS IN A BETTER POSITION TO BENEFIT FROM SUCH GROWTH AS IT CONTROLS THE LARGEST MARKET SHARE IN NIGERIA. THUS, THERE IS A POSITIVE OUTLOOK IN TOP-LINE AND BOTTOMLINE EARNING FOR THE CURRENT FINANCIAL YEAR